Essays on oil price fluctuations, financial markets and international trade

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Author

Le, Thai Ha

Date of Issue

2013

School

College of Humanities, Arts, and Social Sciences

Abstract

This thesis consists of three self-contained essays on oil price fluctuations, financial markets and international trade. The first essay investigates the impact of oil price fluctuations on gold market returns using monthly data from May 1994 to April 2011. A structural vector autoregressive approach is employed to examine the dynamics between oil price shocks and gold returns. Various oil price proxies are used in the empirical examination to capture potential nonlinearities in the dynamics between oil price shocks and gold returns. Oil price shocks appear to have a statistically significant and positive impact on real gold returns contemporaneously. The impact is found to be symmetric but nonlinear. These findings imply that observing oil price fluctuations can help predict movements in gold price, which would significantly help monetary authorities and policymakers in monitoring the price of major commodities, as well as investors and managers in optimizing portfolios. The second essay applies the bounds testing approach to cointegration to the sampling period from Jan-1986 to Dec-2011 to investigate the relationships between the prices of two strategic commodities (oil and gold) and the macro-financial variables (interest rate, exchange rate and stock price). Japan – a major oil-consuming-and-importing as well as gold-holding-and-exporting country is selected as the case study. The findings of this study could help the Japanese monetary authority in conducting monetary policy, market participants and investors of Japanese yen in building their optimal portfolios as well as have the potential for significant impact in further research. The third essay aims to examine whether a large part of the variability of trade balances and their oil and non-oil components is associated with oil price fluctuations. The long-run causality running from oil price to overall, oil and non-oil trade balances and their short-run dynamics are investigated by applying the Toda-Yamamoto’s 1995 (TY) causality approach and generalized impulse response functions (IRFs), respectively to the monthly data spanning from January 1999 to November 2011. Three Asian economies that represent three distinct characteristics in terms of oil are chosen and examined: Malaysia as an oil exporter, Singapore as an oil refinery and Japan as an oil importer. The stability of the causality is also checked and the estimated impulse responses across different periods are examined. The results have implications for both policy makers and economic modeling of the impact of oil price shocks.